Tuesday, 16 June 2015

Property Market – nowhere to call home

House
prices are distorted by demand from investors and governments are making the
situation worse

Houses have become so much more than homes
and many of us are missing out as a result.
More than just a place to live, houses have become the investment option
of choice during turbulent times. The
popularity of investment properties means that buyers looking for a home are
being crowded out of the market. Rather
than correcting this distortion, government policies typically make things
worse and leave the dream of their own home beyond the hopes of many.

No
home sweet home

The property market is never far from any
topic of conversation. Since everybody
needs a place to live, it affects us all.
The substantial price tag that comes with buying a house would be enough
to weigh on anyone’s mind. But property
purchases take on even greater significance as real estate also counts as a
form of saving for the future. The money
tied up in property is the biggest investment that many of us make. This means that the ups and downs of the housing
market shape the financial well-being of many families.

The predominance of property investment is
further accentuated as buy-to-lets become increasingly popular as a means of
putting ones wealth to work. The
abstract nature of shares and bonds along with the shenanigans in the financial
markets makes property seem like the safe-as-houses option. Yet this extra source of demand for real
estate inflates house prices beyond their value as a mere place to live. Investment in real estate brings benefits,
such as providing rental accommodation and improvements to neglected
properties, but the costs also mount as investment in property increases.

With a relatively fixed amount of housing
in large cities, one person’s buy-to-let gets in the way of a house becoming a
permanent home. Along with the benefits
to home owners, neighbourhoods also have a greater sense of community with
stable residents. The higher house
prices due to property investment results in home ownership being coupled with
a larger amount of mortgage debt. This
makes the property ladder more tenuous for debt-laden buyers who could easily
be caught out by any economic hardship.

Need
to make room for more

Governments, which could work to limit
these negative consequences, tend to only exacerbate the problem. Policies targeting the real estate market
differ across countries – tax breaks for mortgage debt, low levels of capital
gains tax, easier access to loans. But
the common thread is that it is all too tempting for governments to please better
off voters by bolstering the property market.
The predominance of monetary policy as the main tool for managing the economy makes this
even worse by stoking up borrowing (and the property market) when the economy
is weak.

While pushing up demand, governments do too
little to boost supply. It is more
housing that is often cited by politicians as the solution to buoyant property
prices but government regulations and zoning rules are not reflective of the
growing need for new houses. Houses take
too long to build while elections are never far off even though more building
would make for good economic policy at a time when the economy is still suffering from a shortfall in demand.

Financial markets are awash with other
places to invest. Our animal spirits should be limited
to parts of the economy where the ups and downs can be absorbed without wider
consequences for the rest of us. Housing
is too important to get caught up in such investment games.